Testing Efficient Market Hypothesis Through M&A Event Analysis

This report investigates the Efficient Market Hypothesis (EMH) through an event study analysis of mergers and acquisitions (M&A). It aims to determine if abnormal returns can be achieved following the announcement of a merger, thereby challenging or supporting the EMH. The study categorizes market efficiency into weak, semi-strong, and strong forms, examining how quickly stock prices react to information. Using fifteen recent mergers reported by Yahoo Finance and employing a standard risk-adjusted return method, the analysis assesses the relationship between company shares and the public announcement date of the deals. The findings suggest some activity in stock prices around the announcement date (day 0), with the semi-strong form of efficiency showing clues within 30 days. The report concludes that while mergers influence market activities, their impact on specific activity purposes may not be decisive, and that mergers generally offer investors hope for returns, especially as organizations increase their market share.

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TESTING EFFICIENT MARKET HYPOTHESIS
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Event Analysis to test the Efficient Market Hypothesis
Mergers and acquisitions, M & A, involves the purchasing, selling, and consolidating of
organizations. Firms, subsequent to consolidating, may take the name of the securing
organization, the objective organization, or simply make another name (Jovanovic, et al., 2016). A
few organizations will converge at the corporate dimension, but for every other reason, the two
people proceed with business as usual (Jarrett & Jeffrey, 2010). This choice depends on what the
supervisors will be able to do in their particular industry (Dong, et al., 2013).
Efficiency of the markets is broadly classified into three distinct groups which are weak, semi-
strong and strong, which provide an explanation of the speed with which the market will respond
to available data, such as a merger. An assumption of market efficiency indicates that purchased
financial services specialists do not have the ability to generate above-market returns because
they operate with all the appropriate data put into consideration. The purpose of this study is to
test this theory to determine whether it is actually possible to obtain a positive, significant and
abnormal return, with the announcement of the merger of a company (Almujamed, et al., 2018).
The possibility for a financial specialist to earn paranormal incomes and returns a merger has
been made public is keenly evaluated by this study (Borges & Maria, 2010). It will, therefore, be a
test of the Market Proficiency assumption, by perceiving the speed with which the cost of a
company's stock reacts to the ad in question. Further impacts on the risk-adjusted stock cost of
companies will be keenly evaluated to determine whether the ad incorporates the solid form,
semi-solid form or low form of speculation taking into consideration the time and the change in
the value of the shares (Ojo & Marianne, 2014). The investigation will include fifteen ongoing

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mergers that have been made public, as reported by Yahoo Finance, and incorporate in the
analysis of the data, the standard risk-adjusted risk method (Al- Khazali, et al., 2017).
The existence of relationships between the companies involved in the merger will be determined
in the process of evaluating the shares of the sample company involved in the acquisition in
relation to the date that the deal is made public. In the event that the market presents a movement
similar to that of the company, the hypothesis of a productive market would then remain constant
and a financial specialist would not have the capacity to obtain a return superior to the normal
one. In any event, should the firm surpass the market for a particular period of time in
comparison to the date the deal is made public, it follows that the probability of obtaining a
higher than normal return may then occur, which could potentially jeopardize the hypothesis of
effectiveness (Westerlund, et al., 2013).
The Efficient Market Hypothesis as explained above usually gives three broad classifications
which are the weak form which is the first one, the second one is the semi-strong form and the
last one being the strong form (Al- Khazali, et al., 2017). The weak form assumption
asserts that the chances of an analyst getting positive paranormal returns are almost impossible if
they were to use previous information from the inventory costs. In the event that the hypothesis
of market efficiency holds, it follows that the costs of the stocks will already have been
integrated this previous information (Powell & Stuart, 2010). The Random Walk hypothesis
explains that financial specialist will sometimes disagree with the stock valuation and that, in this
way, its cost fluctuates here and there (Saeedi, et al., 2014).
The hypothesis explains that, despite the fact that the real valuation of the market may be
obscure, costs will usually fluctuate around the characteristic value, and this usually follows with

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improved market productivity. The next hypothesis of the efficient market theory is the semi-
solid form. Analysts describe this form as a market that takes into consideration all the available
data that is open, preventing a financial specialist from outperforming the market. This
assumption has been tested several times by examining the market's adjustment to open
information, such as ads (Borges & Maria, 2010).
The third type of market competence is the solid form. This form incorporates all the available
data both disclosed and undisclosed. As a result, it is normal that any form of data that may
affect the worth declared for a security, whether or not it is known to a financial services
specialist, will already be adjusted in the marketplace. Indeed, we rely on "inside information" to
be incorporated. A study by (Ajao, et al., 2012) provides an instance of an individual from
the inside realizing that a company engaged in mining activities had found gold. This particular
individual would not have the ability to record more earnings compared to what is offered in the
market with the existing factors because he will be accustomed and privy to what is happening.
It is clear that solid market forms are generally not valid for any markets(Paresh, et al.,
2015).
Suggestions for Possible Tradings going forward
This analysis focused on the impacts of a statement of the organizational merger on the value of
stocks, testing the productivity of the market. The organizations considered for this situation are
British American Tobacco (BAT) and Reynolds American (RAI). Shares from these towing
companies were traded at the New York Securities Exchange (NYSE). The standard system for

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studying risks and balanced risks, as shown by a monetary entry, was significant in the
comparison of the company's profits and returns expected from the market.
Conclusions and Recommendation
The findings demonstrate that there is undoubtedly activity in the cost of the stock towards day
0. Further, evidence from the survey shows that merger have a role in market activities but it
may not be decisive as such in deciding the purpose of the specific activity. The semi-solid
efficiency assumption begins to show clues within 30 days of reporting. For most financial
specialists, the statements will be positive as the organization increases its market share. In this
way, a merger should give the investor hope for return. Some companies merge on a business
dimension and allow both to operate freely (Al- Khazali, et al., 2017).

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